We don't see deflation as a major worry -- ask anyone paying college tuition or health care bills if prices are falling -- and view the Fed's action as yet another attempt to bolster a still anemic economy. Combined with the fiscal stimulus of the recent tax cut, lower rates should lead to a strengthening of the U.S. economy later this year.
Therein lies the problem for investors in bonds. Even though the Fed is signaling that it intends to keep rates low, a stronger economy means increased risk of inflation, which would pressure bond prices. We don't presume to know when the markets will perceive a whiff of inflation. It could be well into next year before prices begin to rise at a quicker pace. Or it could be sooner.
Whenever it happens, bond prices will tank. For that reason, we advise taking 5% out of the allocation to bonds. That still leaves a recommendation of 10% in debt securities. We suggest that your remaining assets in the category be limited to short-term instruments or longer-term Treasuries and high-quality municipals and corporates that you plan to hold to maturity.
We continue to advise keeping 65% of assets in equities as we expect stocks to trend higher by yearend. Why didn't we move the 5% from bonds into stocks rather than cash, which currently yields almost nothing?
The stock market has moved sharply higher since mid-March. We expect it will be in a trading range for a while, and it could dip a bit in the traditionally weak third quarter. Hold reserves to deploy then. Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook